When you read some people on the subject of the forthcoming monetary disaster, you get the impression that they are expecting a new Stone Age in which decades will be spent clawing our way out of the rubble of our collapsed civilization. Libertarians in particular seem to anticipate survival by hardy bands of libertrogs, secure in their mountain retreats, well armed and stocked with food and grain, buying their few wants with gold coins from the embeggared masses who wander dazed about the once great cities, now deserted and returned to the prairie dog and the ecologist.
I find this scenario rather melodramatic.
The impression gleaned from casual reading is that monetary collapse is a rather sharp, quick affair which is over pretty fast. Currency accounts get wiped out and the malinvestments engendered by the preceding inflation are liquidated, but the demand for basic industries and services is still there and jobs are there in those firms. There are difficulties in working out new prices, but that's one of the things markets are good at. Those who depend on currency savings are hurt, but to most people savings are not a life-or-death affair. Government or private charity takes care of the old folks and the workers go back to work, unburdened by their former debts.
The main problem would be if the government steps in "to ameliorate the suffering," "maintain wage levels," "save jobs," and in general acts to keep the mess from getting liquidated so that the thing drags on indefinitely, as was the case in the Great Depression.
All things considered, perhaps the government's prolonging the mess is the most likely course, and we are in for a long, hard time ("once again demonstrating the bankruptcy of laissez-faire capitalism"). But this must be recognized as a speculation on future political action, and not as an inexorable consequence of events now in motion.
The significance of the question, as a practical matter, lies in whether we should sell our home in the city and move to Montana and learn to farm and tan our own leather, against the coming fiscal Gotterdammerung, or whether a sensible investment strategy, plus a few hundred dollars in canned goods in the back closet, will be an adequate coverage.
NOWHERE TO GO BUT DOWN?
Hard money fundamentalists sometimes talk as if they believed that the first slip from 100 percent gold backing leads as surely to a Brazilian-style hyperinflation as their Baptist brothers believe that the first approving sip of demon rum leads to the gutter. But while history shows us that all currencies depreciate through inflation, the spectacular runaway inflations of Brazil, Germany, China and Hungary are remarkable precisely for their novelty.
England, France and Italy, to take a few examples, have experienced serious inflation for several decades. While this period saw substantial losses in money values, the currencies stabilized, albeit at a low level, and have never "gone Brazilian." The French franc, after losing about 99 percent of its pre-World War I value, even enjoyed a brief period under de Gaulle as a hard currency.
Recent months have seen some possibly significant changes in the money situation. For one thing, talk of the possibility of a hyperinflation is being heard from more establishment-type sources. Even Arthur Burns referred recently to the "double digit" Latin American style inflation. For another, we are starting to see institutional buying of South African "Kaffir" gold shares.
This latter development is encouraging because Kaffir owners are no longer quite the exposed remnant that they once were. To the extent these large buyers are longterm holders they will provide a steady base for these shares; on the other hand, their decision to drop Kaffir's in institutional investor-sized lots would have an unsettling effect on the market. In any event, some may feel that since Kaffir ownership is no longer confined to the little folks on the right fringe they may not be as susceptible to casual expropriation as has been feared in the past.
There has also been talk of a flight from money. When you see people paying over $300 for a 20 dollar gold piece containing about one ounce of pure gold, which is about double the bullion price, you can't help but feel that something is wrong. Dealers report that a lot of buyers are new people who aren't too sure what a Double Eagle is, but want a gold coin. This double price can't represent any traditional numismatic premium since collectors can recall when Double Eagles were a glut on the market at $45 apiece! These coins are likely going to a lot of "weak holders." The present inflated premium on these gold coins is very disconcerting. It reminds one of tulip bulbs.
If a person wants to flee from money, it's not all that obvious where he can go. The gold price run-up, and the corresponding mark-up in gold shares, has been so rapid that gold is no longer the conservative investment that it once was.
Natural resources may be an obvious haven but most governments have been behaving so erratically these days that these carry a high risk of political intervention. The Canadian government has been particularly irresponsible on this score, with elaborate and confiscatory tax and royalty schemes. The Australians are also acting up. In the U.S., the machinations of the environmentalists and the economic control berserkers are all too familiar. The Arabs are behaving like Arabs. In most of the rest of the world everything expropriatable has already been expropriated. Only the South Africans are behaving themselves.
Friends who follow the auctions for antiques, art, old flatware, etc., report that the prices realized are coming as a surprise even to the auctioneers, who generally can tell from experience what a piece is going to bring.
A problem with protecting yourself from inflation in today's demagogic political atmosphere is that a successful hedge is apt to be confused with a windfall profit. This may explain part of the attraction for unregistered and inconspicuous hedges, such as our aforementioned Double Eagles, flatware, or antiques.
Davis Keeler's Money column alternates monthly in REASON with John J. Pierce's Science Fiction column.